What is a systematic withdrawal plan?

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A systematic withdrawal plan (SWP) in mutual funds enables an individual to withdraw fixed or variable amount conveniently from his mutual fund portfolio over time. The frequency of the withdrawal in addition to the amount is decided by the investor. Thus, systematic withdrawal plan serves to generate small regular cash flows from one's savings accumulated in a fund over time.

What is a systematic withdrawal plan?

How SWP works?

For providing an investor a certain per-specified amount at regular intervals, the scheme sells the required number of units held by the the investor in a fund. Proceeds of the sale are either remitted in the account linked to the mutual fund scheme or paid by cheque.

What are the benefits of subscribing to SWP plan?

Cash Flow Regularity: SWP plans unlike other fixed income plans such as monthly income plans (MIP) offer regular cash flow at pre-specified intervals for meeting one's financial needs during retirement or otherwise.

Inflation Adjusted Returns : SWP plans more particularly in case you opt for equity-oriented mutual fund schemes offer inflation adjusted returns unlike other fixed income securities.

Tax Advantage: Systematic withdrawal plan also provides tax benefits to an investor. For debt-oriented SWPs an investor is liable to pay short-term or long-term capital gain (STCG or LTCG). As the rate for LTCG tax is fixed at 10% or 20% with indexation in comparison to STCG tax which is taxed as per the income slab of the individual, holding of the investment instrument for over one year will be beneficial of the investor.

Greater tax advantage is provided to investors on opting for SWP from equity-oriented funds as no long term capital gain is payable for investment holding period of over 1 year. So, withdrawal of funds from such schemes do not attract the liability to pay tax.

What is the disadvantage of SWP?

The main and only disadvantage of a systematic withdrawal plan is that it would at some point in time erode an individual's capital that has been accumulated over a period of time.

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Story first published: Friday, August 30, 2013, 15:25 [IST]
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